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LEE Dong-Won

Income Inequality and Social Happiness

LEE Dong-Won

Oct. 9, 2009

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We all have heard that money cannot buy happiness. But it is also true that money is necessary to maintain happiness. Indeed, much of the research on happiness confirms that income and life satisfaction are positively related. The level of satisfaction rises at a slower rate as income increases, however, because it becomes more and more difficult to gain satisfaction to the same degree as increases in income. The law of diminishing marginal return emerges.

In Korea, however, the relationship between income and life satisfaction is unusually low. According to the Korean General Social Survey (2006), high income groups are not more satisfied with life than lower income groups. Why? One reason is that Korean society is more sensitive to income inequality than the absolute level of income. More income does not elicit more satisfaction because people tend to compare themselves with others. If everyone's income rises by the same proportion, no one would feel happier because the relative income does not change. A recent study by Samsung Economic Research Institute ("Income Inequality and Social Happiness in Korea") found that Korea belongs to a group of countries that exhibit low satisfaction with life because of a heightened awareness of income inequality. In contrast, countries such as the US and Mexico have high life satisfaction in spite of wide income disparity, while most North European countries have high life satisfaction and low income inequality.

The problem in Korea's case is that income inequality is rising. It rose sharply during the 1997 currency crisis, when the economy experienced recession and massive unemployment. Likewise, the outlook for income inequality is not good, as the real income of the low income group continues to fall due to the current labor market slump. The lower income group suffers the most from the weak employment situation. Currently, the top 10 percent income group in Korea earns 4.7 times as much as the bottom 10 percent.

Another concern with the rising income inequality is that Korea's middle class, those with 50~150 percent of the median income, is quickly disappearing. Worse yet, much of the disappearing middle class are ending up on the low-income rungs, instead of climbing up the social ladder. For instance, between 1997 and 2005, the proportion in the middle-income bracket decreased by 5.3 percentage points, while the low-income bracket increased by 3.7 percentage points.

Income inequality lowers economic growth by raising tax burdens and causing political instability. Inequality also fuels crime, which undermines the sense of social justice. In addition, many studies claim that heterogeneous societies with widening income inequality tend to undersupply important public assets such as education and infrastructure due to tensions between income classes. For instance, if the rich send their children to the private schools, they will be less interested in financing public schools. Of course, the poor want more tax money diverted to their children's public schools, but such actions often require broad support, including backing from the rich. Thus, Sweden, an income equalitarian country, spends 26.8 percent of GDP for government consumption expenditure, while Mexico, a more heterogeneous country, spends only 11.7 percent.

Many policy measures aimed at resolving income inequality have fallen short. One reason is that the measures have focused on short-term solutions, such as providing welfare payments and consumption coupons. Income inequality, however, should be approached more as a long-term social mobility issue.

Social mobility, how easily an individual moves up or down in the social hierarchy, determines the effect of income inequality on life satisfaction. In general, countries with less vertical mobility tend to have more conflicts between income classes and, thus, they are less happy. According to the Harvard University Professor Alberto Alesina, Europeans are less happy than their US counterparts because they have different perceptions of the social mobility. For instance, according to the World Values Survey, 30 percent of Americans believe that the poor are trapped in poverty, compared to 60 percent of Europeans (Alesina et al. 2004. "Inequality and Happiness: Are Europeans and Americans Different?" Journal of Public Economics 88: 2009-2042).

Since 2000, Korea has turned into a society with low social mobility. The relative poverty rate, or the proportion of households with less than 50 percent of the median income, rose from 7.7% in 1992 to 14.3% in 2008. The rate of exit from poverty declined from 53.5% in 1999 to 42.0% in 2004. Education, the primary way for the poor to conquer social barriers, is also closely tied to income. A recent research found that the children with richer parents tend to have more years of education in Korea. Low social mobility with rising income inequality causes social division.

Therefore, in dealing with income inequality and poverty issues, social mobility must take priority. Improving income mobility can ease the conflicts between income groups and, thus, increase social happiness. To improve social mobility, that is to help the poor move up the social ladder, the government should focus on social services such as job training, education and child care, along with typical welfare assistance.

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